C2ER Monthly Webinar Series

June 19, 20121

THE COST OF LIVING INDEX: APPLICATIONS FOR BUSINESS AND

COMMUNITY

THE COST OF LIVING INDEX: APPLICATIONS FOR BUSINESS AND

COMMUNITY

TODAY’S PRESENTATIONS

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Cost of Living Index

Business Uses

Community Uses

Academic Uses

Introduction Methodology

JonesLangLaSalle Kiplingers

Greater Memphis Chamber

SE Louisiana University Business Center

Module Topic

INTRODUCTION – COST OF LIVING INDEX

Published by Council for Community and Economic Research

Published Continuously Since 1968

 Three Quarters per Year

Participants’ Input/Community Volunteers

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Measure of relative price differences among urban areas

Designed for professional and managerial households in the top income quintile

Prices are collected at a specified time, in strict conformance with standard specifications

What is the Cost of Living Index?

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C2ER Does Not Believe that End Users are Well-Served Unless Methodology is Understood

Data Collection Practices

Formulas

Average Prices Used

Technical Advisory Board

Our Methodology

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Items by Categories

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Designed for a Specific Standard of Living• For first 30 Years, it was a ‘Mid-Management’ SOL

Designed Specifically for Professional/Managerial Households• Top Income Quintile (20th Percentile)

Due to Regional Salary Variation, No One Income is Specified• One Salary Does Not Fit All Locations

Salary Range is $70,000 to $100,000• Expected to be Higher in ‘Traditionally’ More Expensive

Communitieso San Francisco, Boston, New York City, Washington DC, Los Angeles, etc.

A Specific Standard of Living

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Open to All Places for 23 Years• Influx of Small, Rural and Semi-Rural Communities Forced

a Changeo Difficulties of Adhering to Standards and Specifications

Participation Restricted to Federally Designated Metropolitan Statistical Areas – Census Bureau• Participation is Open to Other Areas Meeting Certain

Criteriao Community Population of 35,000 or Moreo County Population of 50,000 or More

• Some Small Communities ‘Grandfathered’ In

Many Communities Cannot Participate• Famous Examples

Who Participates?

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Three-Stage Review Process• First Stage Review

o Look for Computational Errorso Atypical Priceso Unexpected Quarter-to-Quarter Price Shiftso Prices Not in Keeping with State, or Regional Averages

Second Stage Review• Each Report Reviewed Again for Problematic Prices Not

Verified in First Stage• Preliminary Report is Run at This Stage

Third Stage• Project Manager Reviews Prices and Calculations Out of

Line Regionally or Historically• No more than 2 Standard Deviation Points Difference

o Outside Influences May Affect Priceso National Economy

How Do We Know the Data Are Accurate?

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Samples Vary with Size of MSA• Largest Communities at Least 10 Samples• Micropolitan Areas at Least 3 Samples

More Data Gathered, More Accurate the Report• Wide Price Variations Can Reflect Not Enough Samples

Sampling Size

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Grocery Items Index (13.36%)

Housing Index (28.64%)• Monthly principal and interest payment for new

home represents 23.50% of the Composite Index

Utilities Index (10.46%)

Transportation Index (10.66%)

Health Care Index (4.44%)

Miscellaneous Goods and Services Index (32.44%)

Weights

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The most common application of the Index is to compare the differences between two places• MSA #1 and MSA #2 – For Example

Subtract MSA #2’s Index from MSA #1’s Index, Divide the Result by MSA #2’s Index, and Multiply the Answer By 100%• [((115.0-90.0)/90.0)*100%] =(25.0/90.0)*100% = 28%

Fairly Small Differences Don’t Indicate Any Measurable Difference• Sampling and Non-Sampling Errors• Non-Probability Samples Means No Precise Confidence

Interval

How to Use the Index

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U.S. National Average

What Can the Index Tell Us About Dollar Amounts?

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Area A

What Can the Index Tell Us About Dollar Amounts?

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Area B

What Can the Index Tell Us About Dollar Amounts?

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BUSINESS USES When evaluating (re)location options

• COLI is a key measurement tool in the decision process to help determine competitive wages

• Also used to measure the Cost of doing business for retailers/manufacturers.

Helps industries assess the overall economic health of an area • Helps determine if location is a viable option

• Thanks to JonesLangLaSalle 19

BUSINESS USES Most private industries may use some aspects of COLI

• Housing costs and transportation costs are key• Overall COLI may not be applicable to their needs.

Real Estate investors tend to use all of COLI’s features • Residential investors

Determine achievable rental rates and Housing prices

When working with government agencies• Determining levels of need for grant/program funding

• Thanks to JonesLangLaSalle 20

BUSINESS USES Helps with personal finance data

• Government Policy• Environmental issues• Technology

Use of COLI as the research basis• Market outlook stories• Make reliable predictions

State of various economies

• Use with Census Data• Analyze cost of doing business in different metro areas

• Thanks to Kiplingers 21

BUSINESS USES Use in business reporting

• Concentrations of small businesses• Patents and venture capital• Business costs

Use of COLI to break out data on the self-employed• Impact on entrepreneurship and small businesses

Important tool for helping determine location

Changing demographics• Influx of retirees into the economy • COLI data helps businesses adjust

• Thanks to Kiplingers22

BUSINESS USES Kiplingers’ Best Cities series

• Best Cities for Singles:• http://www.kiplinger.com/slideshow/best-cities-for-singles/1.html

• 10 Best Value Cities for 2011: http://www.kiplinger.com/slideshow/best-value-cities-2011/1.html

• 10 Best Cities for Cheapskates: http://www.kiplinger.com/slideshow/10-best-cities-for-cheapskates/2.html#top

• 10 Great Cities for Starting a Business: http://www.kiplinger.com/slideshow/10-great-cities-for-starting-a-business/1.html

• Thanks to Kiplingers

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